No sooner had investors believed that the Fed would not tighten its monetary policy, than the regulator gave them new hints to think about.
During his speech at a virtual conference organized by the Economic Club of Washington, Fed Chair Jerome Powell said that markets should not focus on the regulator's short-term predictions.
According to Jerome Powell, the Fed is unlikely to raise interest rates until the end of 2022. However, everything will depend on the incoming data.
J. Powell also noted that the QE will be phased out much earlier than the rate hike starts.
While the comments from the Fed Chairman did not come as a big surprise to investors, they can be considered a warning.
As a result, the greenback paused its decline after reaching four-week lows around 91.57.
Fed Deputy Chairman Richard Clarida mentioned yesterday that the US central bank may give a hint about curtailing the volume of asset purchases during its next meeting, along with the publication of updated forecasts.
This brings traders back to the idea that the first changes in the regulator's policy may occur before the end of this year.
Previously, market participants relied on the strengthening US dollar and significantly reduced investments in US government bonds, fearing that a sharp and prolonged rise in inflation will force the Fed to tighten monetary policy earlier than expected.
However, repeated statements from the Fed that the price pressure would be temporary reassured investors and forced the greenback and US Treasury yields to retreat from the multi-month peaks reached at the end of last month.
According to analysts at Bloomberg, the idea that the US dollar started to depend on the bond yields looks rather weak.
"This month, the euro has appreciated more than 2% against the greenback and continued to rise following better-than-expected US inflation data. This is another hint that the US dollar is more related to stocks than to anything else at the moment," they said.
COVID-19 is no longer a major risk for the US stock market, according to a recent survey by Bank of America. The effect of raising corporate taxes from 21% to 28% will become evident over time and will have a medium-term nature.
Investors are now optimistic about potential financial results of the largest US companies and their prospects until the end of the year.
However, analysts warn that after strong corporate results for January-March, it will be quite difficult to show growth in the next quarter. So, in the future, reality may not come in line with expectations. Thus, the current period may be the end of the growth cycle that began in March last year. It is likely that during the summer season, the US stock market may enter a phase of correction.
Saxo Bank strategists point out another important factor for the US dollar, bonds, and the broader market - the US Treasury's reduction of its deposit in the Federal Reserve account. Now the deposit amounts to about $925 billion, but by the end of June they it should be reduced to $500 billion. This is a hefty portion of liquidity, so traders will need to pay attention to the specified period.
These events will take place later. Meanwhile, the key US stock indexes keep hitting new record highs, and the greenback continues to remain under pressure.
The US dollar index is currently hovering at around a 50-day moving average at the level of 91.60. A breakout of this mark will take the dollar bears to 91.30. This is the level where the lows of mid-March are located.
Experts at Westpac believe that a breakout below the 91.30 mark will signal an earlier return of the medium-term bearish trend on USD.
"Apparently, the greenback is at a crossroads. In the coming days, the US dollar index should withstand the support near the 91 mark to ensure that there is still a chance for the US dollar to grow amid strong US economic data. In the coming months, the dollar may face more pressure from the key economic indicators," experts said.
"The American currency is still trying to advance amid expectations of outstripping economic growth in the United States compared to other developed countries," they added.
"While profit-taking seems almost inevitable after the recent sharp rise in quotes, the fundamental picture for USD looks much better than at the beginning of the year," Rabobank said.
Analysts predict that the EUR/USD pair will trade in the range of 1.1700-1.2000 in the coming months.
The leaders of the ECB and the Fed, Christine Lagarde and Jerome Powell dismissed fears of market participant about inflation, maintaining hope for a faster economic recovery.
Nevertheless, the markets need more weighty evidence, so they turn to the economic calendar.
While the US statistics released on Thursday exceeded expectations, the EU figures did not impress the EUR/USD bulls.
Germany's inflation report for March showed that the annual inflation rate rose in line with forecasts by 1.7%.
According to the US Department of Commerce, the volume of retail sales in the country accelerated at a record pace since May 2020 by 9.8% in March compared to February, while analysts expected to see a rise of 5.9%.
The number of initial jobless claims in the US for the week ended on April 10 fell by 193,000 to 576,000. The figures fell to the lowest level since the beginning of the pandemic.
Meanwhile, difficulties with the vaccination process against COVID-19 in Europe continue to weigh on the euro.
Recently, the EU has announced that it will receive 50 million additional doses of Pfizer's vaccine in the second quarter of 2021. However, the uncertainty around vaccination remains high as the case of the Johnson & Johnson vaccine is still not resolved.
In addition, Denmark has completely stopped the use of the AstraZeneca vaccine, so other European countries may follow suit.
This means that it will take more time for the population to form immunity to the disease. This also means that the EU economic recovery will take longer as well.
EUR/USD has gained more than 2% since the end of March and has already climbed above the 200-day moving average. However, strong resistance at 1.1990 blocks its way to the upside.
On Thursday, the pair tried to break through this level twice, but these attempts were unsuccessful.
The euro/dollar pair has reached the 1.1990-1.2014 pivot area. According to strategists at Commerzbank, the pair needs to break above this area to ease the downward pressure.
"EUR/USD tested the 1.1990-1.2014 area which is a reversal level. In order to head for 1.2243, bulls need to break through this level. At the moment, the rally still looks like a correction. If the pair is stuck in the area of 1.1975-1.2014, markets will then focus on the downward trend," experts noted.
